
A forensic audit means looking through a person’s or company’s financial records to find details that could be used as proof in court. In the accounting industry, forensic auditing is a specialty, and the majority of large accounting firms include a forensic auditing department. Deep knowledge of the legal rules around forensic audits, along with hands-on experience in accounting & auditing processes.
Forensic audits encompass a wide range of investigative tasks. To prosecute a party for fraud, embezzlement, or other financial crimes, a forensic audit may be conducted. The auditor can be asked to testify as an expert witness in court during the course of a forensic audit. A forensic audit can also look into non-financial fraud situations like divorces, company closures, & bankruptcy disputes.
Forensic Audit Process
It is important for a forensic auditor to possess specialized training in both forensic audit methodologies and the legal aspects of accounting disputes. In addition to standard audit methods, forensic audits require additional actions to be taken.
Plan the investigation
A forensic auditor must be aware of the audit's objectives when they are hired by a client. For instance, the client may have doubts about potential fraud about the given raw material quality. The forensic auditor will organize their inquiry to accomplish goals like these:
- Determine which type of fraud, if any, is being committed;
- Ascertain the duration of the fraud; ascertain how the fraud was concealed;
- Ascertain the identity of the fraudsters;
- Quantify the loss incurred as a result of the fraud;
- Gather pertinent evidence that is admissible in court; and
- Recommend actions that can stop similar frauds in the company in the future.
Collect evidence
The forensic auditor must comprehend the potential kind of fraud that has been committed and how it was carried out by the end of the audit. The amount of evidence gathered must be sufficient to establish the identification of the fraudster(s) in court, disclose the specifics of the fraud plan, and list the parties impacted by the scam as well as the total amount of money lost.
The court will be assisted in comprehending the fraud and the evidence by a logical flow of evidence. It is necessary for forensic auditors to implement security measures to guarantee that records and other evidence are not destroyed or changed by outside parties.
Common techniques used for collecting evidence in a forensic audit include the following:
- Analytical processes: These are used to compare trends over a specific time period or to obtain comparative data from other segments.
- Substantive techniques: These include doing a reconciliation, reviewing papers, etc.
- Understanding internal controls and testing them to discover the gaps that permitted the fraud to be committed;
- Computer-assisted audit techniques: Software tools that can be used to identify fraud.
Interview the suspect(s)
- Reporting: To inform a client about the scam, a report needs to be created. To inform a client about the scam, a report needs to be created. It should include the investigation’s findings, a summary of the evidence, a description of how the fraud occurred, & suggestions to improve internal controls to prevent future incidents. The client must receive this forensic report before deciding whether they want to proceed with filing a lawsuit.
- Court proceedings – Forensic auditors must be present in court to provide an explanation of the evidence gathered and the suspect's identification process. In order for those who are not familiar with accounting terminology to comprehend the fraud that was committed, it would be beneficial if the intricate accounting concerns were made simpler and explained in plain English.
A forensic audit is a detailed process that requires knowledge of accounting, auditing, & legal procedures. A highly experienced forensic auditor needs to understand the different types of fraud that could happen, as well as the steps involved in collecting evidence.
Types of investigation involved in
Forensic audit
The forensic accountant may be called upon to look into a wide range of fraud cases. To give an overview of the diverse range of possible investigations, it is helpful to classify these sorts into three categories. Financial statement fraud, asset theft, and corruption are the three types of fraud.
Corruption
Bribery, extortion, and conflicts of interest are the three categories of corruption fraud. Studies indicate that around one-third of all fraudulent activities involve corruption. When someone commits a conflict of interest fraud, they use their power to further their own interests at the expense of the business. The fraudster might gain an unreported personal benefit rather than financial gain from the scheme. For instance, even in cases where an employee's expenses are erroneous, a manager may nonetheless authorize them in order to preserve the friendship. Bribery is when money (or something else of value) is offered in order to influence a situation. The antithesis of bribery is extortion, which occurs when money is demanded rather than given in exchange for achieving a certain goal.
Asset misappropriation
The most prevalent frauds are by far those that involve asset misappropriation, and there are a wide variety of frauds that fit under this heading. The theft of money or other assets from the business is a recurring theme, such as:
- The theft of money, such as petty cash, from a business's premises is known as cash theft.
- False payments made using business money are known as fraudulent disbursements. Typical instances include payroll methods that pay false employees—often referred to as "ghost employees"—and billing techniques that pay a fictitious provider.
- Theft of inventory from the business is known as inventory fraud.
- Employees that misuse business resources for their own gain are considered to be abusing them.
Financial statement fraud
One form of fraud that results in a major falsification in the financial statements is called fraudulent financial reporting. Intentional manipulation of accounting records, leaving out transactions, balances, or disclosures from the financial statements, or improper use of financial reporting guidelines are a few examples. In order to better any examination of liquidity and gearing, for example, liabilities may be concealed. This is frequently done with the goal of presenting the financial statements with a specific slant.
What is the reason for having forensic audit?
Numerous illicit acts may be revealed or verified by forensic audit investigations. A forensic audit is typically performed in lieu of a regular audit in cases when it is possible that the collected evidence may be presented in court.
The planning, evidence collection, report writing, and potential court appearance phases of a forensic audit are identical to those of a conventional financial audit. The attorneys representing the opposing parties present proof showing the harm incurred is determined by the discovery or refutation of the offense. Should the case proceed to a judge-led trial, they provide the defendant with an explanation of their findings.
Forensic audit investigations are made for several reasons, including the following:
Corruption
In a forensic audit, while investigating fraud, an auditor would look out for:
- Conflicts of interest– when a dishonest person abuses their position to further personal interests at the expense of the firm. For instance, if a management permits and authorizes an employee's erroneous expenses and the employee and the boss have personal relationships. The manager is presumed to have benefited personally from issuing such illegal approvals, even though he did not directly profit financially from them.
- Bribery– Bribery, as the term implies, is the practice of offering money to get things done or sway a situation to one's advantage. For instance, Telemith bought off a Technosmith employee to give specific information so that Telesmith could use it to prepare a tender offer for Technosmith.
- Extortion– It would be considered extortion if Technosmith demanded money in order to provide Telemith a contract.
- Asset misappropriation
The most widespread type of fraud is asset misappropriation. A few instances of such asset misappropriation include cash theft, forging false bills, paying imaginary contractors or workers, misusing assets, and inventory theft.
Financial statement fraud
This kind of fraud is committed by businesses in an attempt to make their financial performance appear better than it actually is. Putting out phony figures could be done to increase liquidity, guarantee that executives receive incentives, or ease pressure on market performance.
The deliberate falsification of accounting records, the purposeful omission of transactions—either of revenue or expenses—the withholding of essential information from the financial statements, and the failure to adhere to the necessary financial reporting standards are a few embodiments of financial statement fraud.
Conclusion
A forensic accountant may be called to look into a wide range of fraud situations. Members of the investigating team must feel at ease appearing in court to explain how the investigation was carried out and how the evidence was acquired, as the inquiry is likely to result in legal proceedings against one or more suspects in the end. It is imperative that forensic accountants get specialized training in these areas to prevent any potential compromise of their credibility and professionalism throughout the court proceedings.
How SKMC Global can help?
SKMC Global is the best firm for forensic audits, our expert’s team are specialized investigations designed to uncover financial issues, fraud, or legal violations, unlike regular financial audits, forensic audits focus on identifying unusual activities, tracking down financial crimes, and gathering evidence for legal cases. These audits are typically led by forensic accounting firms or trained forensic experts who use their expertise to detect & prevent financial risks.
Examining Financial Inconsistencies
Looking through financial records to find odd or questionable transactions that might point to embezzlement, fraud, or other financial crimes. Monitoring the flow of funds through intricate accounts, subsidiaries, or transactions in order to find hidden assets or illegal activity. Identifying indicators of manipulation, such as changed financial statements, things that are not on the balance sheet, or differences between stated and actual income and costs.
Identifying and Preventing Fraud
Use expert's forensic accounting techniques to identify fraudulent activity, including payroll fraud, kickbacks, and false invoicing. Employing methods and tools for data analysis to find trends, abnormalities, and patterns that point to fraudulent activity. It was required to assess how well the business's internal controls prevented fraud and make recommendations for enhancements. Identifying potential fraudulent schemes and weak points inside the firm by carrying out a thorough fraud risk assessment.
Obtaining Proof for Court Cases
Gathering, examining, and classifying pertinent contracts, emails, bank data, and other records to aid in their inquiry. Interviewing staff members, supervisors, suppliers, and other interested parties in order to obtain testimonials and learn more about possible fraud or wrongdoing. Preserving a clear chain of custody for use in court or regulatory inquiries by making sure that all evidence is handled and stored in accordance with legal requirements. Delivering conclusions and elucidating intricate financial issues to support legal claims or defenses, as well as offering expert witness testimony in court or arbitration.
Financial Statement Fraud
Identifying misclassified transactions, underestimated expenses, or overstated revenues intended to skew the financial results. Looking into possible off-the-books liabilities or transactions that aren't properly structured and could be concealed from investors and auditors. Evaluating the business's accounting procedures and policies to make sure they don't purposefully mislead stakeholders and adhere to applicable accounting standards.
Asset Recovery and Tracing
Discovering hidden assets, such as unreported bank accounts, investments, or offshore holdings, by employing forensic procedures. Tracking the flow of money between accounts or organizations to identify potential diversion of stolen or plundered assets. Working with legal teams, frequently in conjunction with law enforcement agencies, to recover assets through court orders, settlements, or negotiations.
Investigations into Cybercrime and Digital Forensics
Examining emails, electronic documents, and other digital communications with digital forensic technologies in order to find evidence of fraud or data breaches. Locating cases of cyber fraud that would have resulted in monetary damages, such as phishing, hacking, or illegal access to financial systems. Preserving the integrity of the data for litigation purposes and making sure that digital evidence is gathered and preserved appropriately for possible use in court. Locating cybersecurity flaws in the business that may have been used to perpetrate financial theft or fraud.
Investigations into Regulatory Compliance
Checking how well the company follows industry rules like SOX, FCPA, or anti-money laundering laws, investigating potential violations, such as insider trading, bribery, corruption, and market manipulation. Working with regulators during investigations, providing detailed reports & evidence to support any actions or fines.
Transactions involving related parties and conflicts of interest
Identifying transactions that are carried out at arm's length and aren't intended to unfairly benefit insiders between the firm and its leaders, family members, or related businesses. Identifying instances in which powerful people may have given friends or family members contracts, jobs, or benefits against company or legal guidelines. Evaluating the governance mechanisms of the business to see if there is enough oversight to stop conflicts of interest or unethical behavior.
Documentation and procedures
Preparing a clear report that sums up the findings of the investigation, highlighting any cases of misbehavior, fraud, or rule violations. Offering recommendations for improvements, like strengthening fraud detection, enhancing governance processes, improving internal controls, also, providing ongoing support to ensure the company stays compliant with legal requirements & implements the suggested changes.
As a industry best Forensic Auditor firm SKMC Global is essential to forensic audits that look into financial anomalies, identify fraud, and guarantee adherence to legal and regulatory standards. Organizations can identify hidden dangers & financial misbehaviour with the help of our experience in forensic accounting, digital forensics, fraud detection, and asset recovery. We also assist in legal cases and help rebuild trust by providing detailed reports & expert testimony.